Hyperinflation in Venezuela: a legacy of financial irresponsibility

October 2017 was one of the most complicated months in the political history of Venezuela. However, in the economic area it was the first month in which the word “hyperinflation” was used to define the financial situation of the country.

 

The country has been in an economic depression since 2014, mainly caused by the fall in oil prices. The economic situation of the Venezuelan citizen has not been considered “good” for years, but it was in 2017 the year in which the situation spiraled out of control.

 

In theory, the Central Bank of Venezuela is the institution in charge of publishing the “consumer price index”, which reflects the monthly accumulated and inter-annual inflation (from the month of the year prior to the current month). However, the BCV has not published this figure since 2015, which is why the Finance Committee of the National Assembly (Parliament) took the responsibility of making these figures public.

 

In October last year, the monthly inflation reached 45.5%, which placed total inflation in the year at 825.7%, a number never before seen in the country.

 

For December -considered by many as the hardest month of 2017- the monthly inflation went to 85%, that is to say it almost doubled in less than 4 months. Meanwhile, the cumulative inflation passed 2616% according to the parliament.

 

It was precisely the president of the Finance Committee, Deputy Rafael Guzmán, who one of the first to point out that the country was in hyperinflation, a situation for which he blamed the policies of President Nicolás Maduro.

 

Since 2011 Venezuela’s international reserves have gone from 30 billion dollars (USD) to less than 10 billion in 2017. Furthermore, costs of products and services skyrocketed due to the “injection of inorganic money” with bolivars being printed but having no support in the economy.

 

In a normal economy, which is not going through a depression and/or hyperinflation, taxes would increase and salaries could possibly be frozen, but this cannot be the case in a country that experienced strong protests in 2017, and that has been in a state of social conflict for the last 2 years.

 

 

To try to “fight” inflation Maduro adopted a policy of increasing the minimum wage in Venezuela, which went from 2,702 VEBs in September 2013 to 248.510 VEBs in January 2018.

 

This policy would be maintained in particular at the end of 2017, although instead of increases in the minimum wage, Maduro implemented “bonuses” which only reach a third of the population and are usually double or triple the minimum monthly salary.

 

He named theses bonuses according to the date in which they are assigned. The “Baby Jesus bonus” in Christmas, the “Bonus of the Magi” in January, and the “carnival bonus” in February, are just some of those that the head of state has delivered to date.

 

A key point in the fall of the purchasing power of Venezuelan citizens has been the currency exchange control, that is to say the State policy that has made it impossible for citizens to change their VEBs for other currencies such as the USD or the Euro.

 

With the strength of the VEB constantly falling, citizens began to get rid of their money seeking to protect it in products, food and especially in dollars. This massive action by Venezuelan citizens led to the destruction of the monthly minimum wage which went from $ 91.35 in September 2013 to $ 3.38 in January 2018.

 

By February 20th, 2018, 1 US Dollar was worth 230.000 VEBs on the parallel market that has been used by the citizens as reference at the time of buying and selling dollars.

 

Given the low value of the VEB, Venezuelans have been forced to take several jobs, do freelance projects and even resell food that they get cheaper to higher prices in order to be able to pay their expenses. However, this is rarely enough and even the more basic activities such as having lunch on the street (450.000 VEBs) or having two beers in a bar (150.000 VEBs) means a considerable expense for an ordinary person in the country.

 

Maduro has developed Venezuela’s own cryptocurrency named ‘petro’. Maduro grandly announced after 20 hours of its release that $700 million worth of the ‘petro’ was sold. However, this figure is heavily disputed by a population that has witnessed Maduro over-stating his achievements time after time. The ‘Petro’ has also come under criticism due to the purchasing restrictions, Venezuelans can only buy ‘Petro’ in exchange for US dollars which is difficult to get a hold of.

The International Monetary Fund (IMF) has predicted a grim 2018 for Venezuelan inflation, with some estimations seeing VEBs to its levels of inflation of 13000%. With such a disastrous economic forecast Maduro is not expected to hold enough popularity when it comes to presidential elections which are scheduled for 22nd April this year. Maduro will hope the ‘Petro’ will turn Venezuela’s economic downward spiral back around, if not we may see more political dismay like Venezuela experienced in 2017.

 

By Luke Ambrose

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